No Jack, All Beanstalk

By William Davis

In the capital markets, “price discovery” is, by definition, the process of setting the proper value of a security. Around the exchanges, investors most times consider factors like supply and demand, current risk attitudes, and the overall economic and geopolitical environment to determine what things are worth. Sometimes, of course, they don’t. Every now and then they’ll just trade their cow for a bag of magic beans.

Tesla Motors was founded by Martin Eberhard and Marc Tarpenning after GM recalled and destroyed its EV1 electric cars in 2003

In today’s fairy tale business, there’s probably no better story than Tesla, Inc.— and no better bean salesman than Elon Musk. It’s well known that the maker of the world’s largest panoramic sunroof has never seen any profits, yet, at this hour, the company is worth around $55 billion, give or take a frunk’s worth of hourly trading. For purposes of price discovery comparison, that puts Tesla market cap on par with GM and more than 35 percent higher than Ford. Both Detroit giants earn profits in the billions, but neither makes a really cool electric car. Or magic harps, for that matter.

After Ford, Tesla – four months older than post-bankruptcy GM — is the second oldest publicly listed American automaker

Tesla, on the other hand, despite building cars so structurally sound they break the NHTSA’s testing machines, produces losses in the billions. Indeed, since going public in 2010, the company has axed a total of $4.6 billion, producing a narrow profit in just two quarters — one in 2013, one in 2016. Tesla’s investors, meanwhile — clearly enchanted by the electric car maker’s future growth prospects – have virtually ignored the company’s less than heroic financial condition.

Only six parts on a Tesla Model S need regular replacement – its four tires and two wiper blades

But not everyone’s so charmed by quiet cars that can accelerate from 0 to 100 kmph in 1.2 seconds. True to form, the ogres at the SEC have launched an investigation into nearly every facet of Tesla’s business, not least of which its wobbly balance sheet. Reports are already out that the firm has more than $10 billion in total debt and $23 billion in total liabilities. Even more ominous, it’s said the company named after the world’s greatest inventor burnt through $1.8 billion worth of gold coins across the first half of the year.

Tesla is the most shorted stock on the NASDAQ

Always the magic bean salesman, Mr. Musk promptly pitched the idea of taking the company private. How? By converting Tesla’s stock from public to private shares – at a sky-high $420 each, or roughly 20 percent higher than the price Tesla commands today. In a message that would make Benjamin Tabart proud, the company’s chairman proposes there’s a golden goose in Tesla’s future and that the stock is actually selling too cheaply.

The giant’s wife was unavailable for comment.

What London-based hedge fund managers are saying…

“Shorts like Tesla have been difficult to hold on to. However, Tesla feels like it is entering the final stage or its life.”

Crispin Odey, Founding Partner, Odey Asset Management

What the numbers are saying…

$407 billion

What John D. Rockefeller’s fortune would equal today using a measure of power known as relative output.

What strategists who have to follow insane markets are saying…

“People are starting to realize that they drove this stuff (cryptocurrencies) up in a feeding frenzy, and they’re starting to realize just how dangerous it is.”

“Unlike the last recession, which featured unsustainable levels of household debt, we believe the next downturn will be traced back to the corporate debt market.”

Asset management firm Guggenheim Partners LLC

What the facts are saying…

All 11 S&P 500 sectors climbed Thursday for the 15th time this year. The groups rose together only nine times in 2017, according to Dow Jones Market Data.

Copper entered bear-market territory for the first time since November 2016 on Wednesday, hurt by worries that trade tensions will lower demand. The industrial metal is down 22% from its four-year highs in June.

Fund managers have a heavier weighting to U.S. stocks than any other region for the first time in five years.

The S&P 500 is up more than 4% so far this year while the MSCI World Index excluding the U.S. is down by more than 4%. It’s the first time that divergence has happened this late in the year since at least 1970.

What folks with ears to the Street are saying…

“Nvidia has long understood that the cryptocurrency business is one of easy come, easy go. But the last part still smarts a little.”

— Heard on the Street Columnist Dan Gallagher

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